How to help your children onto the property ladder

For anyone trying to climb onto the first rung of the housing ladder, rising interest rates are a mixed blessing. Higher mortgage costs might eventually make house prices more affordable, but at the same time the higher cost of servicing a mortgage could mean that the amount they are allowed to borrow reduces too. It looks likely that getting on the housing ladder will continue to remain a challenge for first-time buyers. The average property price for those securing their first home in the UK is now £243,705, according to the Office for National Statistics – an increase of 15 per cent in a year. In London it’s even harder, with the average first-time buyer price around double that.

It’s no surprise, therefore, that the average age of people buying their first property is going up (32 in 2021, according to Halifax) and the role of ‘bank of mum and dad’ becoming more important. According to research by family mortgage broker Tembo, 50 per cent of first-time buyers now report not being able to afford a home without some help from family members.

If you're looking to help children or grandchildren buy a property, you have several options, from gifting, or loaning, money for a deposit to signing as a guarantor for mortgage payments or even taking out a mortgage together. And several of the big lenders have mortgages specifically designed for parents to help children onto the ladder. There are also government schemes to look at, although various conditions have to be met for them to apply. 

Assess the situation

It goes without saying that you need to make sure your needs are met – and any future care needs – before handing over cash to children, or signing up to regular mortgage payments. If you have multiple children or grandchildren, you might also want to make provisions for them. “Splitting assets and wealth between children is a delicate family matter not to be taken lightly,” says Dawn Mealing, head of advice policy and development at Fidelity International. “Children that are not supported when their siblings are may feel a sense of inequity or resentment that can sour relations.”

If you can afford it and if it is appropriate, you could consider gifting the same amount to all children at the same time. But Gary Smith, chartered financial planner at Evelyn Partners, says that more often his clients choose to amend their will at the time of the transaction to ensure that other children get the same amount in cash out of an estate in the event of death. If you go down this route, make sure you update your will as and when gifts to other children are made. 

Finding the right home

Picking the right property can save a huge amount of money and stress. Frances Clancy, associate director at Savills, says that there has been a notable trend since the pandemic of people delaying purchase decisions to buy something larger, which historically could have been a second home. This is because transaction fees are high and you can apply the first-time buyer stamp duty benefits to a larger property. If you’re a first-time buyer and the home is under £300,000, there will be no stamp duty to pay. And if it’s worth between £300,001 and £500,000, you’ll only pay 5 per cent stamp duty on that portion. For properties over £500,000, normal rates apply. 

The cost of the property is likely to vary hugely depending on where in the country you are looking. The table below shows average first-time buyer property prices across the country, according to the latest ONS statistics. 

While most people will have an opinion on future house prices, it is very difficult to predict. Savills expected house prices to rise by 3.5 per cent in 2022, but the combination of rising interest rates and elevated inflation is likely to put a strain on affordability. Over the pandemic, there has been a surge in demand for large houses with outdoor space, but in recent months small flats in central London have seen renewed demand, Clancy says. 

Getting a mortgage

From your child’s or grandchild’s perspective, the more you can help out with the deposit the better, as this tends to lower the interest rate as well as the amount borrowed. 

The average first-time buyer loan to value (LTV) is currently back up to around 77 per cent, according to Savills via UK Finance, having dipped to 74 per cent in the pandemic when banks were reluctant to lend very high LTV mortgages.   

You can choose between a fixed and variable rate, but most people are currently opting for fixed-rate mortgages (around 80 per cent according to Lloyds Banking Group) as expectations for rate hikes rise. However, before your child locks themselves into a five-year fixed rate, make sure they are happy with the terms. Will they still want to be there in five years' time? If not, what is the exit penalty? How easy might it be to port the mortgage? Most mortgages are portable if the new property meets the mortgage criteria and if the transaction happens within a specified time frame – neither of which is guaranteed.

You need to consider the likely future earnings of your child before committing to a large mortgage. If they think they might want to take time out of work to change career or start a family then their ability to meet future mortgage obligations could wane. “A lender will not lend, or will only lend with higher interest rates, if there is job/earnings insecurity. The only way this can be (partly) negated is if someone acts as guarantor,” says Mealing. 

Adrian Anderson, director at property finance specialist Anderson Harris, notes that joint-borrower sole-proprietor mortgages, such as those offered by Barclays, can be popular when parents have an income and want to be part of the mortgage but not noted on the property title deeds. 

The big lenders also have mortgages specifically designed for family members to help first-time buyers. Halifax’s ‘Family Boost’ mortgage, for example, lets a family member put 10 per cent of the purchase price of the home into a three-year fixed-term savings account. The borrower would not need to stump up a deposit, as the family member's savings would be used as security instead. At the end of three years, that family member would get the savings back, with interest, providing all repayments had been met. 

Barclays has a similar ‘Family Springboard' mortgage, but you can only access the money in the savings account after five years. And HSBC’s springboard mortgages enable you to put up collateral in cash or in property. It’s worth noting that these springboard options make repayments more expensive, so if you can you might want to gift or loan deposit money instead. 

When looking for a mortgage, make sure you shop around and speak to different brokers. Price comparison websites such as moneysavingexpert.com are a good place to start. 

Government schemes

It’s also worth considering what government assistance might be possible. Help to Buy is an equity loan towards the cost of buying a new-build (Help to Buy registered) home as a first-time buyer. You’ll need to pay a minimum deposit of 5 per cent then you can take out an equity loan to cover from 5 per cent to 20 per cent of the property purchase price (up to 40 per cent in London). Help to Buy is only available in England and Wales and ends in 2023.  

If your child is a first-time buyer in England, they may be able to buy a home for 30-50 per cent less than its market value as part of the government’s First Homes scheme. They will need to be able to raise a mortgage for at least half the purchase price and have an income of less than £80,000 (£90,000 in London). You can look for new homes in your area that are advertised by developers as part of the First Homes scheme. Developers offer these homes to first-time buyers with 30-50 per cent of the market value taken off the price. The homes cannot cost more than £250,000 (£420,000 in London), after the discount has been applied.

If your child opened a Help to Buy Isa between 2015 and 2019 they can pay in £200 a month (until 2029) and receive a government top-up of 25 per cent (up to £3,000) when they buy their first home, provided it has a purchase price of up to £250,000 (or up to £450,000 in London). This has now been replaced with the Lifetime Isa, which receives a top-up of 25 per cent for annual payments of up to £4,000, but a 25 per cent charge is applied if the money is used to buy a first home over £450,000.   

When buying a property, you want to make sure you put in a competitive offer. Some properties go for under the asking price and some over, so have a look on Zoopla, Rightmove and HM Land Registry to see what comparable properties have been selling for. You also want to make sure you have all your documentation and references ready when you put in an offer to make yourself a strong candidate and let your estate agent know who your mortgage broker is, Anderson says.

He also advises that you don’t cut corners and make sure you commission a survey to be done on the property yourself – don’t rely on the one done by the mortgage company because that only focuses on price and will not give you all the information you might want as a purchaser. The HomeOwner’s Alliance’s tool helps find chartered surveyors in your local area and estimates how much you’ll have to pay. 

If you are helping your child buy a house with their partner, you might want to consider if there are any legal provisions you wish to take to ring-fence your contribution. There is no one-size-fits-all solution as various factors come into play such as the nature of your assistance and the relationship status of your child. If you are happy for your contribution to be treated as a gift then there is little to be done to protect your position, but this area of law is complex and it’s worth seeking specialist legal advice.

Read more:

How I bought a flat in London

How could 'normal' interest rates affect the housing market

Is the housing market structurally sound?

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